Published: July 11, 2013 at 11:20 am

As the costs of higher education rise, the stocks of for-profit education companies find themselves in trouble. Apollo Group Inc (NASDAQ:APOL) has recently reported its first quarter earnings, showing that new degree enrollment has slumped 24.5%. Investors have punished the company’s stock, pushing it down 14% year-to-date. It’s worth noting that the company has beaten earnings estimates by $0.20 while missing revenue by $18.27 million. As the company is making money, are investors missing something when selling the stock?

Tough outlook

Education company stocks greatly depend on student loan interest rates and the country’s employment situation. Total student loan debt is near $1 trillion in the U.S., surpassing both credit card debt and auto loan debt. The main problem is that a lot of families do not do the necessary planning before enrolling in an education program. This leads to problems with debt repayment.

Fears about the student loan bubble as well as dropping enrollment have put pressure on some educational stocks, though some others have done fairly well this year. ITT Educational Services, Inc. (NYSE:ESI) and DeVry Inc. (NYSE:DV) are up 40% and 35% respectively. Enrollment trends in these companies do not differ greatly from Apollo Group Inc (NASDAQ:APOL)’s, however, as the whole industry is facing headwind.

Valuation

Apollo Group Inc (NASDAQ:APOL) trades at a 9.76 forward price-to-earnings ratio, having roughly the same valuation as ITT Educational Services, Inc. (NYSE:ESI), which trades at 9.69 a forward price-to-earnings ratio. DeVry Inc. (NYSE:DV) trades at a premium compared to the other companies’ stocks, scoring a 12.79 forward price-to-earnings ratio. The fact that DeVry has zero debt and pays a dividend that yields 1.07% could be a part of that premium. ITT has a 0.95 debt-to-equity ratio, while Apollo has low debt and 0.08 debt-to-equity ratio. Apollo is the most attractively stock in this group, thanks to a sell-off that occurred after the earnings report. Attractive pricing alone does not move stocks higher, however; it’s the future prospects that matter. Let us take a look at what could happen.

What’s behind the corner?

Here’s what we have. The cost of education is rising, and fewer people are enrolling. Estimated sales decline for current fiscal year is -14.5% for Apollo Group Inc (NASDAQ:APOL), -16.9% for ITT Educational Services, Inc. (NYSE:ESI) and -5.3% for DeVry Inc. (NYSE:DV). The companies are trying to confront this trend by cutting their costs. Doing so has helped them beat earnings expectations in the recent quarters.

Investors are more focused on what might happen further down the timeline. Earnings estimates for the next year have shed 19% for Apollo Group Inc (NASDAQ:APOL), 2.5% for ITT Educational Services, Inc. (NYSE:ESI) and 7.5% for DeVry Inc. (NYSE:DV). It is highly unlikely that education companies will be able to counter declining enrollment rates with further cost cutting because cutting costs has its limits.

The problem of possible debt defaults is more long-term. If you do not plan to own any of the abovementioned stocks for a decade, you should probably not be concerned. The declining enrollment trend is the main problem in the foreseeable future. This trend is fueled not only by rising fees, but also by a shift that is happening in the way that people want to get their education. More emphasis is put on immediate results, and fewer people can afford to wait for several years before receiving their degrees.

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